In 2007, Nassim Taleb published his best-selling book “”The Black Swan: The Impact of the Highly Improbable.”” Taleb contends that banks and trading firms are very vulnerable to hazardous Black Swan events and are exposed to losses beyond those that are predicted by their defective financial models. This proved to be right on the mark as one year later, the financial system almost collapsed due to poor financial models that predicted real estate prices would go up forever.
Will Derivatives Be The Next Black Swan?
“It's déjà vu all over again.” – Yogi Berra
The stock market has long been classified by economists as a leading indicator of the economy. It tracks and reflects the nation’s economy and industry fundamentals. The market often seems able to anticipate positive or negative change before it happens. Since the beginning of the bear market in August of 2015, the prices of many bank stocks, especially European and Japanese banks, have declined steadily and precipitously. Deutsche Bank has lead the way by dropping below the level it reached in 2009. Shares of HSBC, Citibank, Bank of America, Credit Suisse, Goldman Sachs as well many other big banks have also taken a beating of 25-45%.
Black Swan Watch: The Oil Bubble Bursts
Major bear markets are typically caused by sharply rising interest rates, declines in corporate profits, gross overvaluation and severe recessions. The Runnymede team is always diligently and systematically monitoring the standings of these critical variables.
The most challenging factors which we spend time thinking about and analyzing are “”Black Swan”” events. These rare and unpredictable events cause severe damage because of psychological biases that make people individually and collectively blind. One potential black swan in our sights is the US shale oil bubble bursting. This has appeared on our radar screens because of the crude oil crash over the last half year which has seen prices of crude oil fall from $107/barrel to just $46/barrel today. Needless to say, this is a large deviation which has laid witness to a 57% decline in the price of oil. So what are the possible implications for the US economy and the stock market?